Are you really worse off? Er, yes.

Labour has recently made some headway with its message that there is a cost of living crisis - which has continued despite Osborne's recovery. This feeds a number of other important messages, including that this is a recovery for the rich, and that you're being ripped off - and so the energy price freeze fits into the same narrative.

The average non-retired household is today 6.4% worse off since the recession - that was the finding of a report by the Office for National Statistics out earlier this week. It showed that the average household income fell from £37,900 to £32,600, in real terms over the last five years.

In fact, the average household is £300 a year worse off than it was in 2002/03. There is therefore a 'lost decade' of stagnation for household incomes.

This decline in income triggered entitlement to extra benefits (e.g tax credits) so that benefits rose from providing 7.6% to 12.3% of gross income for the median household. This is fundamentally a redistribution in the cost of living from the employer to the state - as a result of pay freezes and pay caps. So when Labour talks about a structural welfare spending cap (not individual benefit caps which are disgraceful) it is alluding to this phenomenon, and pledging to deal with the structural issues - and advocating the living wage is a part of tackling low pay subsidies like tax credits.

The resonance that Labour has had with this line has rattled the Tories.

So, in a blatantly politically-driven misanalysis, HM Treasury has produced data that shows compensation for workers has stayed the same, but what they don't see is that employers are paying more in national insurance and pension contributions. The idea that wages have been cut to sustain or even increase profits is, apparently, a myth.

Sky's economic correspondent, Ed Conway, says the Treasury report explains:

"Overall compensation includes not just wages but also the social contributions made by employers, including pension contributions and National Insurance Contributions. Technically-speaking, these are forms of payment, except that because they don’t go straight into your pocket they don’t feel particularly obvious."

In fact a less kind interpretation of this Tory spin - still not on the Treasury website - is that because it doesn't goes into your pocket, it's not really payment.

So the Tory argument is that pay has gone down (Ed Miliband's cost of living crisis) due to NI contributions going up (all Gordon Brown's fault) and pension contributions going up (your fault for living longer).

However, the argument doesn't really stack up for several reasons:

1. Pension contributions have only gone up in real terms for funded pension schemes - which most workers don't have
2. Part of the reason extra pension contributions are needed are due to pension holidays taken by employers in the 1990s
3. Is the logic of the Treasury analysis of NI rise that a cut in NI would be passed on to workers in higher wages
4. If that's the case why have the cuts in corporation tax not been passed on to workers then? Because corporation tax has fallen from 33% to 28% under New Labour, and now down to 22%.
5. If we're all actually no worse off why - by official figures - are a million more of us living in poverty? Why are half a million of us using food banks this year?

(There's a more detailed and wonkish analysis by the TUC's Duncan Weldon here)

So was this just a political attack to try to blunt Labour's resonant cost of living line? If so, it's another sign of the civil service being used for party political purposes (and not the first time either).

But it's an indication that ahead of this year's Autumn Statement, Osborne has only spin to offer.

The most dishonest Budget ever?

The Budget speech is pure parliamentary pantomime, but even that was undermined this year by the numerous (and mostly accurate) leaks beforehand.

One surprise came before the budget, when February borrowing figures were published and shown to be far higher than expected at £15.2bn. This meant that there would be no net giveaways in the Budget, and reinforces what we have said throughout: if you really want to tackle the deficit you need to get people working (off benefits, paying tax) and spending (VAT revenues) + deficit closes. Even John Cridland, CBI chief, was on Radio 4 this morning conceding the real problem in the UK economy is lack of demand.

But back to the Budget, and to the theme promised in this blogpost's title: dishonesty. Here's a quick rundown of some fairly serious obfuscation or outright lies:

1) A further £10.5bn of welfare cuts
Osborne was rather opaque in his Budget statement, saying:

"I am today publishing analysis that shows that if in the next Spending Review we maintain the same rate of reductions in departmental spending as we have done in this review, we would need to make savings in welfare of £10 billion by 2016"

In the Budget red book (pp.87-88) the figure of £10.5bn is given by 2016-17 and £6.6n by 2015-16, but there is no specification at all as to which bits of the welfare budget might be targeted. All the red book states is:

"The Government will be examining the cost drivers for all areas of public spending, and identifying the further reforms needed to deliver a sustainable welfare system and public services within the resources available."

Of course the major reform that Osborne could pursue would be to create jobs. The OBR projections show even by 2016 unemployment will still be above 2 million. But what this unspecified £10.5bn shows is that Osborne's economic policies are failing, and - although his sums don't add up - he has already decided those with least should pay for it.

2) The higher rate tax stats
If the 'dodgy dossier' of the Blair government was Alistair Campbell's sexed-up Iraq work of fiction, then this government's own will be this gem from HMRC. All the same questions need to be asked because it looks less like the work of an impartial civil servant and more the work of a Tory researcher, without much in the way of analytical skill or economic nous.

It's major crime is to say it hasn't raised much (and less than predicted), only £1bn. A figure Vince Cable dismissed as not much. Of course that was hindered by £16bn of income shifting - highly paid people bringing forward their pay, bonuses, etc to avoid getting hit for 50% when it came in. In future years, such income shifting is impossible, and the amounts raised would be much higher - the Treasury document seems to think over £3bn per year.

The dodgy dossier talks long and gibberishly about the laffer curve (see our take here) and makes some very spurious conclusions that people avoid a 50% rate at £150,000, but not a 45% rate. Go figure!?

Finally of course is the brass neck with which Osborne, Cameron et al claim their stamp duty reforms will raise five times as much from the rich. Of course there'll be neither avoidance on any of that nor any behavioural changes as a result of these new taxes on selling homes worth £2m or more.

But what is most dishonest in some ways is the contradiction between Osborne's bluster against tax evasion and avoidance - "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant" - and the fact that in the face of large scale (though largely temporary) avoidance of the 50p rate, he has decided to reduce it.

Thankfully though, HMRC tells us, it will only cost us £100m per year. Of course if they have got that wrong (and they have) then we can expect more cuts or more borrowing.

3) The 'Granny tax'
I use the twitter-defined name as a shorthand, but Osborne has done is to freeze age-related allowances - the amount of income over-65s can earn tax-free - for existing pensioners, and scrap the relief for those retiring after April 2013.

This will cost millions of mid-income pensioners about £250-300 per year. It is a stealth tax on pensioners, and come May will probably prove as electorally misguided as Gordon Brown's 75p increase in the basic state pension over a decade ago.

The extra dishonesty factor about this is two-fold: 1) it was the only major item in the Budget not trailed in advance; and 2) Osborne announced it in his statement by saying "we will simplify the tax system for pensioners by doing away with the complexity of the additional age-related allowances".

4) The distributional analysis
Alongside the Budget, Osborne published the 'distributional analysis' to show the effects of the changes he has made on people's incomes (Annex B of the Budget red book).

What it does not include is the cutting of the 50p top tax rate to 45p - which would save someone like Bob Diamond at Barclays over £300,000 per year - as apparently "presenting a static analysis would not be representative of likely actual impacts".

What is also necessarily excluded from this analysis is the yet-to-be-specified but committed to £10.5bn extra welfare cuts which will disproportionately hit the lowest income deciles.

So what we see is an analysis that omits both the big tax break for the rich, and the future hammering of the poor. Convenient.


There are other things in the Budget too that will become clearer in time:

• Osborne promised "growth-friendly planning and employment laws" - which is short-hand for 'the environment and workers' rights be damned'
• The pension age will rise beyond 68: "I can confirm today that there will be an automatic review of the state pension age to ensure it keeps pace with increases in longevity". The problem with this is that increasing longevity is highly unequal, i.e. the richer are increasing their life expectancy at a quicker rate than the poorest. This is doubly bad news since poorer people also cannot afford to retire early, so their retirement gets squeezed, while the rich live for longer in retirement.

Some union leaders may have given up the fight, but their members shouldn't

Public sector pensions are affordable and sustainable. That is not just the opinion of LEAP, but of the National Audit Office and the Public Accounts Committee, who both acknowledge, along with the IFS and the Hutton report, that the cost of public sector pensions is falling relative to our GDP - due in large part to the reforms achieved in 2007-08 between the then Labour government and public sector trade unions. These reforms according to the NAO save the taxpayer £67bn over 50 years.


Why then have public sector union leaders, for example those in Unison and the GMB, signed up to a deal that makes further cuts to public sector pensions?

George Osborne announced in his October spending review that he wanted to cut public sector pensions to cut the debt, not in pension schemes (which does not exist), but the debt caused by the banking crisis and recession:

"From the perspective of filling the hole in the public finances, we will seek changes that deliver an additional £1.8 billion of savings per year in the cost of public service pensions by 2014-15 – over and above the plans left to us by the last government."

So why would unions sign up to cuts to public sector pensions to pay for a crisis their members had no role in causing? In effect, by signing up to the government's agenda the unions are also accepting the their argument that a bloated public sector caused the crisis.

But, you may ask, didn't the unions wrangle concessions out of the government? Not according to the government's lead Minister in the dispute, Treasury Secretary Danny Alexander:

The heads of agreement deliver the Government’s key objectives in full, and do so with no new money since our November offer. In future, scheme pension ages will match the state pension age and schemes will be on a career average basis; all the agreements are within the cost ceiling that I set in November, and will save the taxpayer tens of billions of pounds over the decades to come.

Danny Alexander said on 2 November that he was announcing his final offer. So these fake negotiations since have not gained a single penny extra. If not worth signing up to on 2 November, why sign up now?

In a dispute about working longer and paying more for a worse pension, Danny Alexander has won on all three counts. As he told the House of Commons:

"We have already made some changes that deal with short-term pressures, including changing the basis of pension uprating to the consumer prices index and increasing member contributions by 3.2 percentage points, phased over three years. Those proposals are unchanged ... In future, scheme pension ages will match the state pension age"

So on each of the key questions union members should be asking what has my union (in the case of Unison, GMB, ATL, FDA and others) gained so that it could recommend this 'deal' (more honestly described as total capitulation)?

What's more, an emboldened Danny Alexander proudly announced the true political agenda behind the pensions reforms his government sought: "The new pensions will be substantially more affordable to alternative providers". So in signing up to this scheme, union leaders are facilitating the privatisation of their members' jobs as well as the theft from their pensions.

Union members, and even union excecutives, of course have yet to have their say on the proposals, so at the moment this backroom capitulation has yet to be signed off. Union branches and trades councils are already organising for a no vote and to put pressure on their executives, so their leaderships may have to fight again.

To date though, it is a tragic reflection of the UK's trade union leadership that after the biggest strike for a generation, there is an utter vacuum where an industrial action strategy should be. Capitulation now, will leave the government emboldened to cut more jobs, privatise more services, and further constrain pay.

Public sector pensions: the economic crisis debate in microcosm

It occurred to me today that the debate over public sector pensions is actually the debate about the economic crisis in microcosm.

Few deny we have a large deficit. Few would deny that the UK economy is in its most fragile state for a long time. Fewer still would argue that 'something' needs to be done about it. What that 'something' is the subject of vociferous debate.

For the Conservatives (the right, politically and economically) this is the time to wheel out the classic Friedmanite arguments. The crisis, so they allege, was caused by a 'bloated public sector', us 'living beyond our means', 'maxing out the nation's credit card' and 'not fixing the roof when the sun was shining' - from the ideological to the hokey.

Hence why the government states that public sector pensions must be slashed by £2.8 billion per year to pay for the deficit as they are part of that bloated public sector. They'll tell you that 85% of public sector workers have an occupational pension compared to less than 35% of private sector workers, that pensions are gold-plated, that "the pension system is in danger of going broke".


As we know from the Hutton report, the National Audit Office, the Institute for Fiscal Studies and the Public Accounts Committee (and this humorous interview with the witless Francis Maude) public sector pension schemes are not on the verge of implosion, and the pensions are not gold-plated, in fact they average about £5,500 per year. But why let the facts get in the way of a good ideological crusade against the public sector.

Next we come to the middle of the road. Some would call this the centre, but that gives it the illusion of reasonableness, careful impartiality and a thought-out position. Whereas the middle of the road is a completely illogical place to stand. Indeed, as Aneurin Bevan once said, "We know what happens to people who stay in the middle of the road. They get run down". In this group we find the hapless Ed Miliband, leader of the Labour Party, who I think it's fair to say bears a certain resemblance to soon-to-be roadkill; that caught in the headlights blank stare reflecting a completely illogical reaction to the current circumstance.


In Ed Miliband's case this is because the last Labour government, of which he and most of his shadow cabinet were members, re-negotiated public sector pensions - and as such made them entirely affordable. In fact as the Hutton report shows, the costs are falling. Nevertheless, Ed Miliband is determined to stand in the middle of the road and look stupid. So he condemns the Tories for not negotiating seriously, and also condemns the unions for striking against the Tories.

Sadly for Labour this same half-arsed mess is mirrored in their economic policy. They too think the public sector got a bit too big, especially on welfare (Byrne, Miliband, Purnell, etc) and there's too much immigration (Glasman, Miliband, Rutherford). What to do then? Well they've moved away a little bit from the clearly right wing response of Alistair 'cuts deeper than Thatcher' Darling, and now think the cuts are too far and too fast. So they would cut less and slower, but nobody likes to mention what (except for welfare and immigration, to triangulate to the Daily Mail because voters will clearly not see the Tories as more active on those issues). Remember, middle of the road = stupid.

Finally, we have the left represented today by only a handful of politicians, but more importantly by the trade unions and a number of other democratic civil society organisations. They, like the right have a narrative. In short, 'the finance sector caused this crisis, those on low and middle incomes shouldn't be made to pay for it'.


On pensions therefore they point out the voluminous evidence produced by mostly centrist organisations (see above) that show public sector pensions are affordable, sustainable and fair - and make reasoned arguments to that effect.

On the wider economic question too, the trade unions have also put forward a clear alternative (see Unite and PCS for example) that also rejects the needs for mass public spending cuts as counter-productive for the economy.

And so the fight to defend public sector pensions is really about who was to blame for the economic crisis and what we do about it. Like 1974, it's the government or the unions. Which side are you on?

Public sector pensions: unaffordable? untenable?

Is there anyone who hasn't listened to Cabinet Office Minister Francis Maude's mauling on the Today programme last week? (it really heats up at about 8 minutes in)

As well as being evasive about what was up for negotiation, it was clear that either Maude hadn't read the Hutton report or was willfully trying to misrepresent it by saying pensions were getting more costly, and that Hutton had said public sector pensions were 'untenable'.

Later in the day, other Ministers took to the airwaves and suggested that the Hutton report's projected falling costs was based on certain assumed changes that the unions were opposing, including the change in the inflation measure for indexation from RPI to CPI.

It's therefore worth looking at the National Audit Office report, published in December 2010 (in between Hutton's interim and final reports) and does not take into account the indexation change, nor does it make any assumptions in the size of the workforce. It shows reforms agreed between the unions and the then Labour government in 2007-08 "reduces costs to taxpayers by 14 per cent".

It also says, "long-term costs are projected to stabilise around their current levels as a proportion of GDP". So even without these disputed areas (which the government obviously aims to force through) the costs are still not rising, but stable.

The 07-08 agreement is also "transferring from taxpayers to employees additional costs arising if pensioners live longer", which means savings are being provided by public service employees in form of increased contributions or reduced future pension.

The 07-08 deal raised the pension age to 65 for new starters, introduced a career average scheme into the civil service pension scheme, and introduced 'cap and share' arrangements so that unexpected rises would be borne by employees. Labour Cabinet minister at the time, Alan Johnson MP, said it was a "fair and reasonable" deal.

And so to the Labour Party and Ed Miliband, who was very clear (some might say repetitive) in his opposition to the strikes. However, in a briefing to Labour MPs 'PLP brief: Strikes and public sector pensions- 28 June 2011, From the Leader of the Opposition' Ed sets out Labour's position more fully (over 7 pages) yet no more clearly.

In it he says (p.1) "we support serious and long term reform of public sector pensions" and says "John Hutton's report should provide the starting point". But despite repetitively saying that "negotiations are ongoing", the document does acknowledge:

• "Even before John Hutton's final report was published, the government slapped a 3% surcharge on pension payments for millions of public sector workers" (now 3.2% according to Danny Alexander's speech to IPPR on 17 June); and
• "Lord Huton argued that public sector pensions in the UK are affordable in the long run"
• "[The government is] switching the indexation of public sector pensions to CPI from RPI"

The above seems to counter Ed Miliband's line that negotiations are ongoing, and even the document hints at this by saying "If the government wants, they could have proper discussions. If that happens, there's no need for these strikes". This strongly implies proper discussions are not happening, undermining Ed's insistence that it's wrong to strike when negotiations are ongoing. Even Francis Maude was virtually forced into a confession of the sham nature of the talks under scrutiny from Evan Davis and Mark Serwotka (Radio 4 Today).

Unions met with the government again this week (for the first time since 30 June), but little movement seems to have been achieved, according to this Reuters report.

It is important that both the media and the Labour opposition begins to cut through the spin and misrepresentations and hold the government to account on this issue. It is even more bizarre for the Labour Party since, by tacitly supporting further changes, they are saying their own 2007-08 deal was ineffective, despite the National Audit Office proving the contrary.

Why the private sector is no model for the public sector to emulate

Last week John Cridland, director of the CBI, dismissed the impact that public sector union strikes could have. He said: "Today the most they can do is disrupt people's lives – it probably won't disrupt the economy." (reported in Guardian)

Does that mean we should discount today's ramblings by the British Chamber of Commerce (BCC) which told the BBC "many parents would lose pay for taking the day off work to look after their children, and productivity would be hit" - while demonstrating the private sector's longstanding flexibility, understanding and provision of childcare needs.

With an even greater ability to demonstrate why the public sector doesn't want to be leveled down to the private sector, David Frost of the BCC went on to give his view on pensions, adding "reforms to bring them into line with those in the private sector are essential ... The private sector has had to wake up to the tough realities of pension provision in a rapidly changing world".

Mark Serwotka, PCS general secretary, rebuts this point in today's Morning Star,

"The truth that private-sector workers have suffered horrific attacks on their pensions is indisputable. It neither follows from this truth that public-sector workers should suffer the same fate nor that public-sector pensions are unfair on private-sector workers"

The "rapidly changing world" the BCC refers to has seen the number of private sector workers entitled to an occupational pension slip from nearly half a decade ago to under one-third today. Yet, corporate profitability has increased through that period, and the directors of large companies have pension pots that have continued to rise unabated. The average chief executive of a FTSE 100 company now has a pension pot worth £5.6 million.

What the private sector bosses are worried about is neither the impact of the strikes nor the injustice of public sector pensions, but the fear that the pensions debate might highlight the injustice of private sector pensions.

See the LEAP guide: Public Sector pensions - the Facts

Public Sector Pensions – The Facts

With 750,000 public sector workers about to take strike action on 30 June, public sector pensions are a hot topic. The government is trying to persuade us that they are unaffordable and unfair to those in the private sector. The reality is that low and middle income earners in the public and private sectors are being treated unfairly:

1. The cost of public sector pensions is falling. As noted in the Hutton Report, public sector pensions cost 1.9% of GDP today, but will fall to 1.4% by 2060.
2. Public sector pensions are affordable and sustainable. Reports by National Audit Office (December 2010) and by the Public Accounts Committee (May 2011) find this to be true.
3. Public sector pensions are not ‘gold-plated’. The average public sector pension is around £5,000 per year. For a woman in local government the average is £2,600.
4. Private sector pensions cost the taxpayer too. Private sector pension schemes received £37.6bn in tax reliefs in 2007/08 – that same year they paid out pensions worth only £35bn, research by Richard Murphy shows.
   
5. Cutting pensions means increased eligibility for means-tested benefits. LEAP estimates the cost of providing council tax benefit, housing benefit and Pension Credit to pensioners will be £13.5bn this year.
6. Private sector pensions are often poor or non-existent. But the blame for that is on private sector executives (many of whom have very good pensions) and shareholders.
7. But some private sector pensions are very generous. In 2009, TUC research showed the average value of a FTSE 100 director's total pension rose to £3.4m
8. There are 2 million pensions living in poverty in the UK. A European Commission report in July 2009 showed that only in Cyprus, Latvia and Estonia was there higher pensioner poverty than in the UK.
9. Life expectancy is rising faster for the wealthy. An average 65 year old man in Kensington and Chelsea can expect to live a further 23 years, while in Glasgow it is only 14 years. Raising the pension age has a disproportionate impact on low and middle income earners.
10. We’re all this together – public and private. Changing pension indexation from RPI to CPI would save the private sector £100 billion over the lifetime of existing schemes, according to Pension Capital Strategies. According to TUC research, an 80 year old pensioner with an average public sector pension would be more than £650 a year worse off.

Update: The latest YouGov/Sunday Times poll (pdf) has revealed the unions edging in front in the battle for public opinion – with an almost equal split on Danny Alexander’s reforms and a small majority against Lord Hutton’s proposals. On Hutton, who proposed public sector workers should contribute more to their pension, retire later and receive a lower pension, 43% oppose his plans against 38% in support. Those in the private sector support him 46%-33%, with public sector workers strongly against, by a margin of 66%-21%.

Update 2: An ITV/ComRes poll shows public believe 'Public-sector workers are right to strike over maintaining their pensions': Agree 48%, Disagree 36%.

Update 3: A new ComRes poll finds 49% of people agreed that public sector workers have a legitimate reason to strike, only 35% didn't. By 46% to 35%, people believe that the Government would be wrong to change public sector pensions if most workers affected oppose them.

Pensions attack brings tipping point nearer

On both sides of the Atlantic, a massive onslaught is under way with the single purpose of dramatically reducing the share of national wealth going to working and retired people in favour of the rich, powerful elites who own and control the economy.

This is not an “ideological attack”, as some trade union leaders in Britain claim, but capitalism trying to “solve” the crisis that has enveloped the system since 2008 in the only way known to it.

The global market for commodities has shrunk, with recession and unemployment taking over. As the low-cost Chinese and Indian economies seize the initiative, corporations operating in North America and Europe are desperate to drive down costs and increase the surplus going to shareholders as the basis for “renewed growth”.

In Britain this week alone, the Coalition launched its historic attack on welfare benefits, including the disability living allowance (DLA), and published proposals that undermine public sector pensions. The aim is to cut DLA expenditure by 20% by 2015-16. The Disability Alliance says: “We believe the new approach risks over 835,000 disabled people losing what is often described as an essential ‘lifeline’ of support.”

Yesterday, with considerable help from Labour peer Lord Hutton, public sector pensions were hung out to dry. Under the plans, firefighters and others will have to work well into their 60s, pay more in contributions and receive less in pensions than at present. Pay more for less, in other words.

Yet, as a table in the Hutton report shows, the actual cost of the present public sector pensions scheme as a share of national income is forecast to decline over the next 20 years. So this is all about spending cuts and a redistribution of wealth to the private sector.

Which is the story in Wisconsin, where a union-busting law has been railroaded through the state legislature by Republicans against a background of mass opposition which has included sit-ins and demonstrations into the early hours of the morning. The Wisconsin bill “could spell the beginning of the end of public-sector unions,” warned former US Labour Secretary Robert Reich.

Collective bargaining rights are substantially eroded and state workers have to pay 5.8% of their salary toward pensions and 12.6% of their health-insurance costs. Calls for a state-wide general strike are under discussion. Similar moves are afoot in Ohio as states face up to a combined debt of $100 billion that results from the recession.

In Britain, as in the United States, the question is how to fight against capitalism’s attempts to make workers pay for the crisis. In Britain, it certainly cannot be through the Labour Party which is essentially glove in hand with the Coalition. Labour-controlled councils have, for example, passed on government spending cuts at town hall level.

Labour leader Ed Miliband, who favours a “fairer”, “prosperous capitalism”, instructed his backbenchers this week to abstain (!) on the government’s anti-welfare legislation, leaving a handful of MPs like John McDonnell to do the right thing and vote against. Why did Miliband do this? Because many of the government’s proposals actually follow from attacks on benefits begun by New Labour, so there is no disagreement in principle between the two major parties.


While trade union leaders lined up to attack the Hutton report and threatened strike action, Labour’s response was muted to say the least. Angela Eagle, shadow chief secretary to the Treasury, only said that “it would be deeply unfair for public sector workers to disproportionately bear the brunt" of what were “tough choices”. Thank you and good night.

Add in soaring prices for food and fuel, rising unemployment, the attack on the NHS and other public services and you sense that a tipping point is coming. Most people will soon find it simply impossible to get by. When that occurs, the road to take will be more like Egypt’s ongoing revolution than one-day protest strikes and lobbies of an undemocratic Parliament stuffed full of pompous, self-seeking “representatives”.

Paul Feldman
Communications editor
www.aworldtowin.net

Hutton and the government: wrong and unfair on public sector pensions

Full text below of letter printed in today's Guardian


As economists we are opposed to the public sector pension reforms proposed by this government and Lord Hutton.

Public sector pensions are far more efficient than private pensions. The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much. The total cost of providing tax relief to all higher rate taxpayers, on their private pensions, is more than five times as much.

By changing pension calculations from the RPI measure of inflation to CPI, pensioners (in all sectors) will be made hundreds of pounds worse off, with the loss accumulating as pensioners get older. The vast majority of economists and statisticians recognise that RPI is a more accurate inflation measure.

Taken as a whole these changes are a substantial disincentive to save because they will encourage people, already burdened by student debt, high housing costs, and the need to save when the social security safety net is being withdrawn, to leave public sector pension schemes and abandon provision for their old age altogether. This contradicts Iain Duncan Smith’s words earlier this week about rewarding saving. If public sector workers opt out of their schemes because of rising costs, it could leave some schemes in jeopardy.

The government claims these changes will help reduce the deficit, but they will take money out of the pay packets of today’s workers and from tomorrow’s pensioners, suppressing demand and damaging any prospect of recovery, as well as increasing pensioner poverty.

On public sector pensions, as on so much else, the government has got it wrong.

Richard Murphy, Tax Research LLP
Andrew Fisher, LEAP
Howard Reed, Landman Economics
Dr Stephanie Blankenburg, SOAS
Professor Prem Sikka, University of Essex
John Christensen, Tax Justice Network
Professor Gregor Gall, University of Hertfordshire
Colin Hines, Green New Deal Group
Bryn Davies, Union Pension Services

Iain Duncan Smith, smoke and mirrors, and pensioners

A long campaign of the UK pensioner movement has been to restore the link with earnings.

One of the first acts of the coalition government was to do that with a new 'triple lock' - meaning pensions would rise by the greater of earnings, inflation or 2.5%. However, inflation was redefined as CPI rather than RPI. In a parliamentary debate last month, LEAP chair John McDonnell asked the Minister 'Did the Minister ever consider a quadruple lock so that, earnings or inflation, CPI or RPI, whichever was the higher, would be used?

The fact is that because of stagnating wages and rising inflation (on the more comprehensive RPI measure) the 'triple lock' may in the short term provide pensioners with a real terms cut, as even the Pensions Minister was eventually forced to admit.

Pensioners and pension campaigners were inevitably cautious when Iain Duncan Smith, author of what the LRC describes as the "pernicious and dogmatic" Welfare Reform Bill, allowed it to be leaked to the press that he might uprate the basic state pension to £140 per week, and scrap means-testing.

With the basic state pension currently languishing at £97 plus change per week (increasing to £102 in April) that might seem some considerable largesse. However, Pension Credit - Labour's means-tested minimum guarantee - will be worth £137.35 per week from April.

If IDS introduced his rumoured £140 per week basic state pension from April 2012, then that would be a real terms cut for those in receipt of Pension Credit (137.35 plus inflation of say 4.5% would mean £143.53 per week from April 2012. However, mitigating circumstances in IDS's favour would be the fact that means-tested Pension Credit only reaches about 66% of those entitled to it - so one-third of the poorest pensioners are missing out.

As an aside £16 billion in benefits goes unclaimed every year. Far more than the £1.5 billion lost in fraud or the £3.5 billion lost due to errors (by officials and claimants combined)

But the real issue is being missed. Why is that £140 is the rate under discussion, when the pensioner poverty line is £170 per week?

The problem is that the UK pays an appallingly low level of pensions, which leaves over 2 million pensioners in poverty and 3.5 million in fuel poverty. Pension expenditure accounts for just 6% of our GDP, compared with 12% in France and 10% in Germany.

Until this is addressed, Iain Duncan Smith cannot expect, and certainly won't receive many cheers from pensioners (present and future), especially when his government is cutting local services on which pensioners rely: libraries, day centres, social care, etc.

Today's Morning Star also demolishes IDS's bluster under the title 'Duncan Smith fails to convince on pensions'

Perpetuating the myths on public sector pensions

There is no greater mythology than that surrounding public sector pensions. There second great mythology is that John Hutton (now Lord) was ever anything but a Tory - he was picked to write a report on public sector pensions (interim report published today) because he would write exactly what the Tories wanted to hear.

The infamous and ubiquitous “gold-plated” public sector pension is of course largely a myth. The average local government pension resides at just under £4,000 per year. Excluding the upper echelons of the senior civil service, the average civil service pension is only slightly higher at £4,200 per year (a positively tin-plated £80 per week). For teachers the average is a more healthy – yet far from gold-plated – £9,000 per year. Overall, the TUC suggests the average public sector pension is £5,500 per year.

Public sector pensions have already been attacked though by the indexation changes announced in George Osborne's Emergency Budget in June. According to TUC research, an eighty year old pensioner with an average public sector pension would be more than £650 a year worse off – equating to £12.50 per week.

The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much. The cost of providing tax relief to all higher rate taxpayers, on their private pensions, is more than five times as much.

Ignoring all the facts, Hutton today said "This is a problem and we can't go on as we are."

So he recommended higher employee contributions, raising the retirement age, and ending final salary schemes.

Osborne will indicate government thinking on public sector pensions in the Comprehensive Spending Review on 20 October. When setting up the commission Osborne described public sector pensions as "unsustainable". Thing is they're not: the cost of public sector pensions today is 1.9% of GDP in 2010-11, but by 2060 that will have fallen to 1.4%.

Of course, the other calculation to make is that if public sector pensions are reduced, it will simply result in more people being entitled to means-tested benefits such as Pension Credit.

The final report will be published just prior to the March 2011 Budget - and then the attacks will start. Until then expect to hear lots more about 'gold-plated', 'unsustainable' public sector pensions. Just remember, it's bollocks.

Update: great article in the Morning Star on unions' responses to the report

Update 2: Great letter from Richard Murphy in today's Guardian: "in 2007-08, private pension funds in the UK received subsidies amounting to £37.6bn while paying pensions in that year of just £35bn to those in retirement. The result was that in that year every single penny of pensions paid in the UK were paid at direct cost to the UK taxpayer, and none in effect by anyone else. The question Hutton should therefore be asking is not whether pensions should be paid by taxpayers or not, but whether there is in fact any viable, working alternative to pensions being paid by taxpayers?"

Poverty in retirement - the Coalition blueprint for pensions

Andrew Fisher

The Coalition government has, in just two months, attacked pensions on an unprecedented scale. This attack has also been comprehensive – attacking the state pension, public sector pensions and private sector occupational pensions.

This has been implemented in the context of a ‘pensions timebomb’ – because people are living too long or because public sector pensions are too generous. This is false, the real ‘pensions timebomb’ is the potential for a huge increase in the levels of pensioner poverty.

Before looking at the specifics and impacts of the new government’s policies, it is worth considering the current state of pensioner poverty in the UK.

Pensioner poverty today
In 1998 the government calculated that 2.9 million pensioners lived in poverty. By 2005-06, pensioner poverty had declined to 1.9 million – thanks to a combination of the means-tested Minimum Income Guarantee (which later became Pension Credit) and the Winter Fuel Allowance.

However, as inflation increased and the economy collapsed this progress was less consistent. In 2006-07 pensioner poverty increased to 2.1 million – with London pensioners affected most severely (23% of the capital’s pensioner population). In 2007-08 it fell back to 2 million. In 2008-09 it fell further, to 1.8 million.

Pensioner poverty still however compares unfavourably with the rest of the EU. A European Commission report in July 2009 showed that only in Cyprus, Latvia and Estonia was there higher pensioner poverty than in the UK. On the EU measure, 30% of UK pensioners live in poverty – the EU average is 19%.

The Basic State Pension
The current basic state pension is £97.65 per week (£5077.80 per year). In 1981 the state pension was worth 23.7% of average earnings. That year the Thatcher government broke the earnings link, and the value of the state pension has declined to just over 14% today.

The Coalition Government has been praised for immediately re-establishing the link between pensions and earnings – something that New Labour resisted for 13 years, and had only pledged to do in 2012, “subject to affordability and the fiscal position”.

For most of New Labour’s years in government, the rise in earnings exceeded RPI inflation. Restoring the link with earnings would have meant a real terms increase in the basic state pension. In 2010, earnings are expected to be well-below inflation, and probably in 2011 too. The government’s pay freezes in the public sector will help this to be the case.

The new government has though committed to a ‘triple-lock’- the higher of earnings, CPI and 2.5%. Unfortunately for pensioners, in the next couple of years at least RPI is expected to be higher than all three of the ‘triple-lock’. The Budget redbook reveals that the move from RPI to CPI on pensions and benefits will save the Exchequer £13 billion over five years (no disaggregated figure for pensions only is yet available).

Raising the state pension age to 66 by 2016 will also have a devastating and very unequal impact. An average 65 year old man in Kensington and Chelsea can expect to live a further 23 years, while in Glasgow it is only 14 years.

By the age of 64, the majority of men are not working. Raising the pension age to 66 will neither make more jobs available nor them more attractive to employers. For some it will mean them claiming Jobseekers Allowance or Employment and Support Allowance – both cheaper than the basic state pension.

Public sector pensions
There is no greater mythology than that surrounding public sector pensions. A Guardian editorial on 5 July stated:

“if only union leaders would show the steely pragmatism that so often eludes them, and borrow a line from the Conservative manifesto – we're all in this together”
“If the state's workforce can convince the country that it is after copper- and not gold-plated pensions, then it might just start to win hearts and minds”

The infamous and ubiquitous “gold-plated” public sector pension is of course largely a myth. The average local government pension resides at just under £4,000 per year. Excluding the upper echelons of the senior civil service, the average civil service pension is only slightly higher at £4,200 per year (a positively tin-plated £80 per week). For teachers the average is a more healthy – yet far from gold-plated – £9,000 per year . Overall, the TUC suggests the average public sector pension is £5,500 per year.

Nevertheless, these sums are overly generous and the government has commissioned former New Labour Minister John Hutton to review public sector pensions. All indications suggest that higher employee contributions (for lower pension values) will be recommended – further hitting the real incomes of pay frozen public sector workers.

Public sector pensions have already been attacked though by the indexation changes announced in the Budget. According to TUC research , an eighty year old pensioner with an average public sector pension would be more than £650 a year worse off – equating to £12.50 per week.

The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much. The cost of providing tax relief to all higher rate taxpayers is more than five times as much.

Private sector occupational pensions
Shortly after the Budget, on 8 July, Pensions Minister Steve Webb MP announced that the government would legislate to alter the standard for calculating defined benefit schemes from RPI to CPI.

This is a significant saving for corporate Britain – already benefiting from the £24.7 billion of corporate tax breaks over five years announced in the Budget . The exact saving has been calculated by Pension Capital Strategies as £100 billion over the lifetime of existing schemes.

Meanwhile, the private sector continues to close or dilute final salary pension schemes. BBC management is proposing to change current pension scheme rules, to allow no more than a 1% annual increase in the amount of salary that can be considered toward a pension, irrespective of any pay rise or promotion staff might get.

This could cost staff tens or even hundreds of thousands of pounds in retirement. For example, a man aged 25 who joined the BBC five years ago, currently earns £25,000 and gets a 4.7 per cent pay rise every year, could have looked forward to a pension worth £31,266 a year on retirement at age 60. Under the new proposals, his pension collapses to about £9,200 a year. Over a retirement of twenty years, this is a loss of over £400,000.

It’s not bad news for all private sector pensions though. According to the TUC's 2009 PensionsWatch survey, the average accrued pension for FTSE 100 Directors was £247,785 a year – an increase of 28% since 2007.

And of course top earners in the private sector benefit most from pensions tax relief. 60% of the gross tax relief – more than £22 billion a year – goes to higher rate taxpayers. A quarter of tax relief – nearly £10 billion a year – currently goes to the one per cent of the population who earn more than £150,000.

Conclusion
The Coalition government is clearly using the national deficit and its own honeymoon period as an opportunity to introduce measures that have little to do with tackling the deficit and more to do with protecting the privilege of its class base.

The comprehensive and simultaneous attack on pension rights should enable public and private sector workers and trade unions, as well as existing pensioners to unite in common campaigns to tackle this attack on the most basic security for working people – dignity in retirement.

Public pensions - the myth

In the ongoing saga of which party can cut most, public sector pensions have come under the attack from both the Tories and the Lib Dems.

Of course the whole terms of the debate are nonsense. The budgetary deficit has been caused by the bank bailout rather than runaway public spending - let alone alleged 'feather-bedded' public sector pensions. This argument was comprehensively dismantled by LEAP's Graham Turner* in an article earlier this year. Public spending has only increased by 1.9% in the last year.

Looking at public sector pensions, the myth that somehow public sector workers are retiring into luxury is somewhat punctured by the fact that over 100,000 retired civil servants are on pensions of less than £2,000 per year. A further 100,000 are on less than £4,000 per year - hardly munching their morning muesli with Moet are they?

TUC research published on Wednesday also shows that 2.5 times as much of public sector money is spent subsidising private sector pensions through tax relief - and that 60% of this tax relief is for higher rate earners.

So yet again, the Tories and the Lib Dems are scapegoating the poorest - without any evidence base. Unusually New Labour has not jumped on this bandwagon yet.

Today's Morning Star highlights where the fat cat pensions really are.

*Graham Turner also has a new book 'No Way to Run an Economy' out now.

The Economic Crisis and Pensions

In November 2008, LEAP published its Red Papers on the Economic Crisis. One of the papers, 'Pensions after the Credit Crunch' by Graham Turner, concluded that:

• The slide in the FTSE 100 could reverse all the rises since the early 1990s, as the recession bites – leaving a multi-billion black hole
• Remaining final salary pension schemes are likely to close, and private pension values dwindle
• There may be no escape from a return to a higher, state funded pension.

Earlier this week, the National Pensioners' Convention issued the following press release - and it seems points one and two are happening while, almost inevitably, the Government is doing nothing to protect people from this crisis.

Credit crunch puts pressure on company pensions –
only the state can now offer security in retirement

Britain’s biggest pensioner organisation, the National Pensioners Convention (NPC) has called on the government to strengthen the state pension system in light of reports casting doubt on the future of decent company pension schemes.

The call comes as the National Association of Pension Funds is expected to announce on Monday (Jan 26) that 25 major companies will close their final salary pension schemes to existing members, and replace them with less secure defined contribution (money purchase) schemes.

The NPC has criticised successive governments for relying on good quality occupational pensions as a way of avoiding having to pay a decent state pension. But this approach is now unravelling:

• At least 75% of final salary occupational pensions have closed to new entrants
• The current economic crisis is estimated to have wiped £250bn from pension funds
• The average private pension pot will eventually give a single man of 65 an annual income of £1,960. A pension pot of £100,000 will give you a yearly sum of just £4,500
• Up to 9m existing workers have no pension provision other than the state

Joe Harris, NPC general secretary, said: “If we are serious about giving everyone a decent income in retirement, we must end the over-reliance on private occupational pension schemes which are governed by a volatile stock market. The pensioners of tomorrow – just like today’s pensioners – need security and that will only come when we recognise, like our European counterparts, that the state is best placed to provide it through a living state pension that ends poverty in old age.”

The NPC is calling for the state pension to be set above the official poverty level of £165 a week for all men and women and linked to earnings or prices (whichever is the greater).

This could be financed through a number of measures, including:

• Using the surplus in the National Insurance Fund, which currently stands £46bn, and is forecast to grow to £114bn by 2012
• Abolishing the upper earnings limit on national insurance contributions would raise at least £8bn a year
• Scrapping higher rate tax relief and tax avoidance (through tax havens) on private pension contributions could raise up to £40bn a year